Brave New World

Spring Budgets have had little to promise or offer UK savers and investors in recent years, apart from setting out the depth of the economic challenge ahead for the coalition government. Only last year, the mood was subdued, with talk of a potential triple dip into recession and a long and bumpy road to recovery. The UK’s economy, twelve months on, is undergoing a regeneration and a rate of growth that is now the fastest in the Western world. As Britain looks towards a general election in May 2015, the Budget contained far-reaching changes for its savers and investors.

Chancellor George Osborne, in his address on 19 March, said the Budget rewarded “the makers, the doers and the savers” in Britain. And the new pension and tax-efficient saving arrangements certainly offer radical reform of the UK’s personal finance landscape and welcome breaks for savers and investors after four years of austerity. A significant change in pension arrangements has lifted restrictions on access to pension pots and made it more attractive for individuals to invest for their retirement through pensions. And the reform of Individual Savings Accounts (ISAs) brings a very welcome increase in the annual allowance to £15,000 from July this year.

The boost that the 2014 Budget has given to investors, however, comes amid continued austerity, with the government only halfway through the fiscal consolidation it embarked on in 2010. Public borrowing levels still remain at £108 billion for 2014 (www.parliament.uk, 21/3/14). When the coalition came to power in 2010, Osborne had planned to balance the budget by 2016. Instead, the aim is 2019 (www.gov.uk, 19/3/14). The recovery also remains prone to wider global risks, whether from China’s economy or Russian military action. Meanwhile, there are widespread concerns that the recovery has been driven by consumers running down their savings, while households are squeezed by living costs as prices rise faster than earnings.

But the good news for business, markets and households is that the UK economic recovery has entrenched. In March, the Office for Budget Responsibility (OBR) revised up its forecast for the pace of the recovery in 2014 to 2.7%, from 1.8% a year ago (when its estimate for 2013 growth was a mere 0.6%). The OBR also expects earnings will grow by 2.5% this year, and inflation by 1.9%. Osborne, in these more secure conditions, packed his Budget with a broad range of pre-election giveaways, including a reduction in the savings tax rate and an increase in the personal tax-free allowance to £10,500 for 2015/16. The Budget also restated that the Inheritance Tax threshold will remain at £325,000 until April 2018.

Investors have done well as growing economic confidence, loose monetary policy and low-interest rates have buoyed equities in the leading financial centres. Although 2014 is unlikely to match last year’s market advances, market returns are expected to reflect the improvement in the global economy and corporate and consumer confidence. In this upbeat environment, the Budget’s ISA allowance increase holds out further investment opportunity, particularly for those that want an alternative to the near-zero returns on offer from cash.

The Budget’s relaxation of ISA rules to allow any combination of stocks and shares and cash rightly gives investors more flexibility to manage their valuable allowance to suit their attitude to risk and their needs. However, the Bank of England Governor, Mark Carney, remains adamant that the base rate will remain at a record 0.5% low while the economy recovers; and is widely expected to be held at this level until mid-2015 (www.bbc.co.uk, 20/2/14). It seems unlikely that the government would welcome a rise in interest rates just before it goes to the polls.

Osborne’s move to increase the annual ISA allowance to £15,000 was designed to encourage Britain to set aside more for the future. With mild inflation still eroding the value of cash, the hope must be that investors make the most of the long-term benefits provided by this even more valuable and flexible opportunity.

Osborne’s decision to champion investor choice has also underpinned the more flexible new pension regime. Perhaps most radically, he has made proposals to free up access to pension pots and change the rules for annuities from April 2015, as well as introducing a new pensioner bond. The proposal to allow anyone over the age of 55 to take their entire pension pot as a lump sum (albeit with 25% tax-free and the remaining amount liable to Income Tax) is a radical innovation that allows individuals to invest, save, spend or give as they see fit. As an interim measure, the guaranteed income required before qualification for flexible drawdown has been cut to £12,000, from £20,000, and this retrospective move will allow anyone in drawdown to benefit from the increased flexibility.

The more liberal regime, too, complements the traditional annuity route and the security it offers for those who want a guaranteed income over their retirement lifetime. Annuity investors will benefit when interest rates start to rise; while drawdown investors can encounter problems in the face of stock market volatility. The new pension regime admirably hands more control to individuals over their long-term financial plans. But, as with all financial planning, each person’s needs and appetite for risk or security are distinct. Retirement planning requires expert, not off-the-shelf, solutions. Osborne’s brave new world for savers and investors creates further nuances and complexities that make wealth management advice as important as ever.